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Apple's Beats acquisition may prove to be a huge money maker


Let's be honest: Apple's $3 billion acquisition of Beats Electronics isn't a sexy acquisition. The deal doesn't provide nearly as much room for speculation and intrigue as would exist if Apple purchased a company like, say, Nest or Netflix.

But the more I look at the deal and the overall headwinds of the music industry, Apple's acquisition of Beats may very well prove to be a huge money maker for the company. And depending on how Apple chooses to position Beats against Spotify, it may even help drive iOS sales later down the road.

In acquiring Beats, Apple now has a subscription music service under its control. Apple also has over 800 million credit cards on file. The combination of the two is extremely potent and will allow Apple to more efficiently leverage those credit card accounts.

Allow me to cite my own listening habits -- which have changed considerably -- as an example. Whereas I used to buy quite a bit of music on iTunes, I now pay Spotify $9.99 a month instead. That money could have just as easily have ended up in Apple's pockets had they had a similar service available.

With Beats now in the picture, a compelling music offering from Apple might very well cause me to dust off my iTunes account for the first time in a long time. I imagine many others are in a similar boat. Even if Apple's Beats acquisition doesn't help lure Spotify users back into the fold, it might certainly help stem the tide of users leaving the embrace of iTunes for more attractive alternatives.

The thing is, for many people today the question isn't whether or not to buy or stream music, but rather where to stream music. Apple simply isn't the only game in town anymore, and the ever impressive growth of sites like Pandora, Spotify, and YouTube just can't be ignored. As a quick illustrative example, the number of paying Spotify subscribers increased by over 60% in just about one year's time. And though there are far more people today who buy music than who stream it, that divide is rapidly shifting before our eyes.

The $3 billion Apple shelled out for Beats is the most it's ever spent on any acquisition, but the monthly billing cycle of a subscription service coupled with the immense popularity of iOS makes the deal rather promising from a financial perspective. Again, Beats will enable Apple to revive many of the credit card accounts that have since become dormant in the face of new ways to consume music.

In a research note touching on this very topic, Morgan Stanley analyst Katy Huberty highlighted how quickly Apple might be able to recoup its investment.

Spotify, which is generally viewed as the leader in streaming music, has 10M paying subscribers or about 25 % of its over 40M active user base. If Apple charges $10 per month, same as Spotify, every 1% penetration of Apple's 800M user base, equates to $960M revenue annually, adding 8 pts of growth to online services and half a point to total company growth.

And with the iOS homescreen remaining the most valuable piece of screen real estate in mobile today, Apple can put the Beats app front and center on every new iOS device it ships. Slap on a free trial, show users the benefits of a subscription service, and Apple can quickly become a serious Spotify competitor. In fact, if Apple can get just 1.25% of its 800 million strong userbase to sign up for a music subscription, it will already have as many paying members as Spotify.

During this year's Code Conference, Apple's Eddy Cue said that there are currently 40 million active iTunes Radio listeners. And that's for a service that's more or less hidden away behind the iTunes icon. Just imagine how much more traction Apple could get for a music subscription service with more prominent placement.

So while Apple's Beats acquisition may not engender notions of innovative cool technology, the business potential here is immense. Apple has hundreds of millions of credit cards on file. It also has a loyal and ever growing base of users who, on average, are often more willing to spend money on digital goods than their Android counterparts. Consequently,the Beats acquisition gives Apple a way to leverage those accounts more effectively.

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